CHAPTER TWO

Organization
Strategy and
Project Selection

Copyright 2014 McGraw-Hill Education.

All Rights Reserved.
PowerPoint Presentation by Charlie Cook

Where We Are Now

22

Why Project Managers Need

to Understand Strategy
Changes in the organizations mission and
strategy
Project managers must respond to changes with
appropriate decisions about future projects and
adjustments to current projects.
Project managers who understand their
organizations strategy can become effective
advocates of projects aligned with the firms mission.

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Projects and Strategy

Mistakes caused by not understanding the role of
projects in accomplishing strategy:
Focusing on problems or solutions with low strategic priority.
Focusing on the immediate customer rather than the whole
market place and value chain.
Overemphasizing technology that results in projects that pursue
exotic technology that does not fit the strategy or customer need
Trying to solve customer issues with a product or service rather
than focusing on the 20% with 80% of the value (Paretos Law).
Engaging in a never-ending search for perfection only the
project team really cares about.

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The Strategic Management Process:

An Overview
Strategic Management
Requires every project to be clearly linked to strategy.
Provides theme and focus of firms future direction.
Responding to changes in the external environment

environmental scanning

Allocating scarce resources of the firm to improve its

competitive positioninternal responses to new programs

Requires strong links among mission, goals,

objectives, strategy, and implementation.

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Four Activities of the Strategic

Management Process
Review and define the organizational mission.
Set long-range goals and objectives.
Analyze and formulate strategies to reach
objectives.
Implement strategies through projects

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Strategic
Management
Process

FIGURE 2.1
27

Characteristics of Objectives

Specific

Be specific in targeting an objective

Measurable

Establish a measurable indicator(s) of progress

Assignable

Make the objective assignable to one person

for completion

Realistic

State what can realistically be done with

available resources

Time related

State when the objective can be achieved,

that is, duration

EXHIBIT 2.1
28

Project Portfolio Management:

The Need for a Strong Project Priority System

The Implementation Gap

The lack of understanding and consensus on strategy
among top management and middle-level (functional)
managers who independently implement the strategy.

Organization Politics
Project selection is based on the persuasiveness and
power of people advocating the projects.

Resource Conflicts and Multitasking

Multiproject environment creates interdependency
relationships of shared resources which results in the
starting, stopping, and restarting projects.
29

Benefits of Project Portfolio Management

Builds discipline into the project selection process.
Links project selection to strategic metrics.

Prioritizes project proposals across a common set

of criteria, rather than on politics or emotion.
Allocates resources to projects that align with
strategic direction.
Balances risk across all projects.
Justifies killing projects that do not support strategy.
Improves communication and supports agreement
on project goals.
EXHIBIT 2.2
210

A Portfolio Management System

Design of a project portfolio system:
Classification of a project
Selection criteria depending upon classification
Sources of proposals
Evaluating proposals
Managing the portfolio of projects.

211

Portfolio of Projects by Type

FIGURE 2.2
212

A Portfolio Management System

Selection Criteria
Financial models: payback, net present value (NPV)
Non-financial models: projects of strategic
importance to the firm.

Multi-Weighted Scoring Models

Use several weighted selection criteria to evaluate
project proposals.

213

Financial Models
The Payback Model
Measures the time the project will take to recover
the project investment.
Uses more desirable shorter paybacks.
Emphasizes cash flows, a key factor in business.

Limitations of Payback:
Ignores the time value of money.
Assumes cash inflows for the investment period
(and not beyond).
Does not consider profitability.

214

Financial Models (contd)

The Net Present Value (NPV) model
Uses managements minimum desired rate-of-return
(discount rate) to compute the present value of all net
cash inflows.
Positive NPV: project meets minimum desired rate

of return and is eligible for further consideration.

Negative NPV: project is rejected.

215

Example Comparing Two Projects

Using Payback Method

EXHIBIT 2.3a
216

Example Comparing Two Projects

Using Net Present Value Method

EXHIBIT 2.3b
217

Nonfinancial Strategic Criteria

To capture larger market share
To make it difficult for competitors to enter the market

To develop an enabler product, which by its introduction will

increase sales in more profitable products
To develop core technology that will be used in next-generation
products

To reduce dependency on unreliable suppliers

To prevent government intervention and regulation
To restore corporate image or enhance brand recognition

To demonstrate its commitment to corporate citizenship and support

for community development.

218

Multi-Criteria Selection Models

Checklist Model
Uses a list of questions to review potential projects
and to determine their acceptance or rejection.
Fails to answer the relative importance or value of a
potential project and doesnt to allow for comparison
with other potential projects.

Multi-Weighted Scoring Model

Uses several weighted qualitative and/or quantitative
selection criteria to evaluate project proposals.
Allows for comparison of projects with other potential
projects
219

Sample Selection Questions Used in Practice

Topic

Question

Strategy/alignment

What specific strategy does this project align with?

Driver

What business problem does the project solve?

Success metrics

How will we measure success?

Sponsorship

Who is the project sponsor?

Risk

What is the impact of not doing this project?

Risk

What is the project risk to our organization?

Risk

Where does the proposed project fit in our risk profile?

Benefits, value, ROI

What is the value of the project to this organization?

Benefits, value, ROI

When will the project show results?

Objectives

What are the project objectives?

EXHIBIT 2.4
220

Sample Selection Questions Used in Practice

Topic

Question

Organization culture

Is our organization culture right for this type of project?

Resources

Will internal resources be available for this project?

Approach

Will we build or buy?

Schedule

How long will this project take?

Schedule

Is the time line realistic?

Training/resources

Will staff training be required?

Finance/portfolio

What is the estimated cost of the project?

Portfolio

Is this a new initiative or part of an existing initiative?

Portfolio

How does this project interact with current projects?

Technology

Is the technology available or new?

EXHIBIT 2.4 contd
221

Project Screening Matrix

FIGURE 2.3
222

Applying a Selection Model

Project Classification
Deciding how well a strategic or operations project
fits the organizations strategy.

Selecting a Model
Applying a weighted scoring model to align projects
closer with the organizations strategic goals.
Reduces the number of wasteful projects
Helps identify proper goals for projects
Helps everyone involved understand how

and why a project is selected

223

Project Proposals
Sources and Solicitation of Project Proposals
Within the organization
Request for proposal (RFP) from external sources
(contractors and vendors)

Ranking Proposals and Selection of Projects

Prioritizing requires discipline, accountability,
responsibility, constraints, reduced flexibility,
and loss of power.

Managing the Portfolio

Senior management input
The priority team (project office) responsibilities
224

A Proposal Form
for an Automatic
Vehicular Tracking
(AVL) Public
Transportation
Project

FIGURE 2.4A
225

Risk
Analysis for
500-Acre
Wind Farm

FIGURE 2.4B
226

Managing the Portfolio System

Senior Management Input
Provide guidance in selecting criteria that are
aligned with the organizations strategic goals
Decide how to balance available resources
among current projects

The Governance Team Responsibilities

Publish the priority of every project
Ensure that the project selection process is open
and free of power politics.
Reassess the organizations goals and priorities
Evaluate the progress of current projects
227

Project
Screening
Process

FIGURE 2.5
228

Priority
Analysis

FIGURE 2.6
229

Balancing the Portfolio for

Risks and Types of Projects
Bread-and-butter Projects
Involve evolutionary improvements
to current products and services.

Pearls
Represent revolutionary commercial opportunities
using proven technical advances.

Oysters
Involve technological breakthroughs
with high commercial payoffs.

White Elephants
Showed promise at one time
but are no longer viable.
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Key Terms
Implementation gap
Net present value
Organizational politics
Payback
Priority system
Priority team
Project portfolio
Project screening matrix
Project sponsor
Sacred cow
Strategic management process
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